NOV  13  J913 


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The 

Administration 
Currency  Bill 


JODHESS  BY 


GE 


BEFORE  THE  DELEGATES  TO  THE  CONVENTION  OF  THE 
MINNESOTA  BANKERS*  ASSOCIATION,  AT  DULUTH, 
MINNESOTA,  THURSDAY,  JULY  lO,  NINETEEN  THIRTEEN 


^www.archive.org/details/administrationcuOOreynrich 


The 

Administration 
Currency  Bill 


ADDRESS  BY 


GEORGE  M.  REYNOLDS 

President  of  the  Continental  and  Commercial 
National  Bank  of  Chicago 


BEFORE  THE  DELEGATES  TO  THE  CONVENTION  OF  THE 
MINNESOTA  BANKERS*  ASSOCIATION,  AT  DULUTH, 
MINNESOTA,  THURSDAY,  JULY  lO,  NINETEEN  THIRTEEN 


< 


Mr.  President  and  Gentlemen  of  the  Minnesota  Bankers^  Association: 

Recognizing  as  I  do  that  the  need  for  early  currency  legisla- 
tion is  imperative,  it  is  with  conflicting  emotions  that  I  undertake  a 
public  discussion  of  the  Administration  Currency  Bill. 

While  I  hope  for  the  earliest  possible  enactment  of  a  good  cur- 
rency law,  still,  my  great  desire  in  this  respect  cannot,  and  I  feel 
should  not,  stifle  my  convictions  as  to  the  soundness  and  probable 
efficiency  of  the  plan  covered  by  the  bill  which  has  been  introduced. 

I  do  not  want  to  criticise  the  legislative  measure  offered  for 
enactment  into  a  law  simply  for  the  sake  of  opposing  the  plan 
embodied  in  that  measure,  but,  rather,  I  want  to  be  clearly  under- 
stood as  being  willing  to  waive  all  petty  and  technical  objections 
to  the  plan,  in  the  hope  that  discussion  and  analysis  of  it  may 
result  in  its  modification  to  the  extent  that  it  will  conform  as 
nearly  as  possible  to  the  legitimate  and  pressing  needs  of  the 
business  of  the  country,  and  at  the  same  time  be  fair  to  the  banks 
and  also  assure  a  just  and  equitable  treatment  of  the  public  when 
the  new  plan  is  put  into  operation. 

I  am  well  aware  that  the  enactment  of  legislation  is  very 
largely  the  result  of  the  application  of  a  ''give  and  take'*  policy, 
for  there  are  so  many  in  Congress  whose  views  must  be  consid- 
ered that  any  bill  finally  passed  must,  to  some  extent,  be  a  com- 
promise bill,  and  I  have  long  since  abandoned  the  hope  of  securing 
such  legislation  as  I,  or  any  other  individual,  might  regard  as  ideal. 

Inasmuch  as  no  one  individual  can  possibly  know  all  upon  this 
or  any  other  subject,  it  is  to  be  presumed  that  a  consensus  of  opinion 
of  many  should  represent  greater  wisdom  than  the  opinion  of  one. 
How^ever,  to  make  this  literally  true,  the  consensus  of  opinion  of 
the  many  must  be  the  result  of  a  broad-gauged  and  open-minded 
consideration  of  the  subject,  free  from  all  prejudice  and  precon- 
ceived notions,  so  that  their  conclusions  will  reflect  equity  and 
justice  in  all  their  ramifications. 

As  a  result  of  personal  interviews  with  President  Wilson  and 
his  administration  heads  who  have  been  charged  with  the  respon- 
sibility of  preparing  a  currency  bill,  I  have  been  impressed  it  is 
the  earnest  desire  of  all  concerned  to  devise  the  best  plan  which 
it  may  be  possible  to  enact  into  a  law.  Therefore,  I  believe  they 
will  welcome  constructive  criticism  of  the  bill,  for  I  feel  that  they, 
too,  will  recognize  the  wisdom  of  accepting  the  consensus  of  opin- 
ion of  the  many  rather  than  to  rely  upon  the  knowledge  or  belief 
of  but  a  small  number. 

The  bill  is  intended  to  provide  for  a  system  of  banking  and 
currency  in  the  United  States  which,  while  it  will  give  a  greater 
elasticity  in  our  credit  and  banknote  issues,  should  also  protect  our 
organization  of  credit  and   give  stability  to   our  business.     It  is 

268725 


sought  to  bring  this  about  through  a  provision  for  the  establishment 
of  twelve  Federal  Reserve  banks,  one  each  in  twelve  important 
commercial  cities  so  geographically  located  as  to  be  best  calculated 
to  serve  the  needs  of  all  sections  of  the  country. 

It  is  proposed  these  Federal  Reserve  banks  shall  be  organized 
by  means  of  having  the  banks,  both  National  and  State,  of  any  one 
district  subscribe  to  the  stock  of  the  Federal  Reserve  Bank  of  that 
district  to  the  extent  of  20  per  cent  of  the  capital  of  the  subscrib- 
ing bank,  one-half,  or  10  per  cent,  of  which  is  to  be  paid  in  cash,  the 
balance  to  stand  as  a  liability  against  the  subscribing  bank.  The 
amount  of  capital  of  any  Federal  Reserve  Bank  would,  therefore, 
depend  upon  the  number  of  subscribing  banks  in  any  district  and 
the  amount  of  their  capital.  It  is  stipulated,  however,  that  no  Fed 
eral  Reserve  Bank  shall  start  with  a  paid-up  capital  of  less  than 
$5,000,000. 

Thus  it  will  be  seen  that  to  establish  a  Federal  Reserve  Bank  in 
any  region,  the  banks  in  that  region  subscribing  to  its  capital  stock 
would  necessarily  have  to  have  a  capital  aggregating  $50,000,000; 
they  might  have  more,  with  the  result  that  the  Federal  Reserve 
Bank  would  have  as  much  larger  capital  than  $5,000,000  as  10  per 
cent  of  the  aggregate  capital  of  all  member  banks  would  exceed 
$50,000,000. 

It  is  provided  that  each  of  these  Federal  Reserve  banks  shall 
have  nine  directors,  three  of  whom  shall  be  elected  by  the  member 
banks  from  bankers  in  the  district,  and  three  by  the  member  banks 
from  among  the  business  men  of  the  district  who  are  not  bankers 
and  who  shall  fairly  represent  the  agricultural,  commercial,  and 
industrial  interests  of  that  section.  Three  additional  are  to  be 
selected  by  the  Federal  Reserve  Board  at  Washington,  one  of  whom 
shall  be  designated  by  that  board  as  Federal  Reserve  Agent  and 
who  shall  have  an  office  in  the  premises  of  the  Federal  Reserve  Bank 
and  be  the  chairman  of  its  Board  of  Directors.  The  board  thus 
constituted  shall  have  the  right  to  elect  its  own  officers  and  manage 
its  own  business,  subject  to  such  supervision  and  control  of  the 
Federal  Reserve  Board  as  has  been  provided. 

So  far  as  I  can  see  this  is  satisfactory,  except  that  I  think  the 
Federal  Reserve  Agent,  who,  it  is  provided,  will  represent  the  Gov- 
ernment on  the  board,  should  not  be  its  chairman  even  though,  as 
as  I  understand  from  the  authors  of  the  bill,  this  is  meant  to  be 
only  an  honorary  position  and  it  is  not  intended  he  should  have 
anything  more  to  do  with  managing  the  business  than  his  influence 
as  one  director  would  give  to  him. 

The  provision  made  for  allowing  member  banks  to  discount 
commercial  paper  is  satisfactory  also,  except,  that  the  bill  does  not 
limit  the  amount  of  rediscount  to  which  any  one  bank  shall  be 
entitled.  I  think  this  should  be  modified  to  make  the  limit  of 
rediscounts  for  any  member  bank  an  amount  equal  to  its  capital. 
Otherwise  the  door  will  be  open  for  inflation. 


Assuming  that  you  have  read  and  are  somewhat  familiar  with 
the  bill,  and  appreciating  I  could  not  in  the  short  time  allotted  to 
me  undertake  an  exhaustive  discussion  of  its  details,  I  ask  your  kind 
indulgence  while  I  call  your  attention  to  and  discuss  briefly  four 
sections  of  the  bill  which  I  regard  as  comprising  its  most  important 
special  features. 

Placed  in  the  order  of  their  importance  from  the  standpoint  of 
principle  as  well  as  in  their  practical  effect,  should  they  be  adopted, 
I  would  group  the  sections  as  follows : 

(1)  The  one  providing  for  the  organization  of  the  Federal 
Reserve  Board; 

(2)  That  relating  to  the  proposed  treatment  of  the  National- 
Bank-United-States-bond-secured  notes ; 

(3)  The  note  issues; 

(4)  The  reserves. 

Believing  that  in  the  interest  of  the  public  welfare  the  Govern- 
ment should  exercise  a  certain  supervision  or  control  over  the  ne\Y 
system,  in  a  regulatory  way,  the  framers  of  the  bill  have  provided 
in  it  for  the  creation  of  a  Federal  Reserve  Board  of  seven  members, 
which  will  include  the  Secretary  of  the  Treasury,  the  Secretary  of 
Agriculture,  and  the  Comptroller  of  the  Currency,  respectively,  the 
four  additional  to  be  appointed  by  the  President  of  the  United 
States. 

Inasmuch  as  the  three  first  named  would  be  members  of  the 
President's  official  family,  receiving  their  office  through  appoint- 
ment by  him,  it  will  be  seen  that  the  entire  Federal  Reserve  Board 
would  be  appointees  of  the  President;  and  since  by  the  terms  of 
the  bill  itself  not  more  than  one  of  the  directors  appointed  to  serve 
on  that  board  must  be  a  banker  of  wide  experience,  thereby  pro- 
hibiting the  sole  ow^ners  of  the  stock  from  the  right  of  representa- 
tion, in  fact,  excluding  them  from  any  participation  in  the  delibera- 
tions of  the  board,  bankers,  business  men,  and  thinking  people, 
generally,  regard  this  prohibition  as  most  revolutionary  in  charac- 
ter and  calculated  to  place  our  whole  system  of  banking  under  the 
domination  and  control  of  a  purely  Political  board. 

Inasmuch  as  it  is  made  obligatory  upon  the  National  banks 
of  the  country  to  become  subscribers  to  the  stock  of  the  Federal 
Reserve  banks  (and  it  will  be  necessary  for  the  National  banks, 
generally,  to  comply  with  this  requirement  if  the  plan  becomes  suc- 
cessful) they  would  be  compelled  to  subscribe  for  $200,000,000  of 
stock,  one-half,  or  $100,000,000,  of  which  they  would  have  to  pay  in, 
and  in  addition  they  would,  in  accordance  with  the  reserve  require- 
ments, upon  which  I  will  touch  later,  be  compelled  by  law  to  carry 
about  $550,000,000  of  their  reserves  with  the  Federal  Reserve  banks, 
over  which  the  Federal  Reserve  Board,  composed  exclusively  of 
the  partisans  of  the  particular  political  party  in  control,  would 
exercise  a  dominating  or  controlling  power.  Do  you  not  think  the 
people  of  this  country  should  deliberate  upon  this  fact  and  care- 
fully weigh  the  possibilities  involved? 


Instead  of  offering  a  system  sufficiently  attractive  within  itself 
to  cause  the  bankers  of  the  country  to  desire  to  go  into  it  on  its 
merits,  as  I  claim  it  should  be,  we  are  told  we  mus't  contribute 
approximately  $650,000,000  to  its  success,  and,  by  implication  at  least, 
we  are  told  we  are  not  worthy  to  be  represented  on  the  Federal  Re- 
serve Board. 

If  the  Government  can  rightfully  compel  the  banks  to  contrib- 
ute this  vast  sum  for  this  purpose,  would  it  not  follow  that  it  could 
compel  corporations  doing  an  interstate  business  to  invest  their 
funds  for  some  other  purpose;  and  if  so,  how  long  do  you  think 
there  would  be  any  capital  invested  in  enterprises  over  which  this 
drastic  prerogative  could  be  exercised  by  the  officials  of  the  Gov- 
ernment ? 

It  is  one  of  the  traditions  of  the  Anglo-Saxon  race  and  in 
accordance  with  the  spirit  of  true  Americanism  that  capital  must 
be  managed  by  those  who  supply  it,  and  furthermore,  that  the 
investor  must  be  free  to  decide  whether  or  not  he  shall  make  invest- 
ments; yet,  we  are  confronted  with  a  plan  which  proposes  to 
compel  the  banks  of  the  country  to  turn  over  to  a  political  com- 
mittee virtual  control  of  about  Ten  Billion  Dollars  of  banking  power, 
the  result  of  fifty  years  of  conscientious  labor  on  the  part  of  the 
officers  of  7,000  National  banks  in  the  United  States. 

I  want  to  say  here  and  now  that  I  am  firmly  of  the  belief  the 
Government  should  have  some  supervision  over  the  system  of  bank- 
ing and  currency  which  shall  be  established,  but  it  should  be  purely 
regulatory  and  not  of  an  initiative,  administrative,  or  controlling 
character. 

Since  banks  are  only  the  "warehouses"  for  the  money  and 
credit  of  the  country,  thereby  providing  places  to  which  the  peo- 
ple may  go  either  to  deposit  their  money  for  safe  keeping  or  to 
secure  credit  to  the  extent  of  their  needs  against  the  money  so  left, 
whatever  is  provided  for  in  a  banking  system  that  will  be  either 
beneficial  or  detrimental  must  ultimately  fall  with  full  force  upon 
the  public.  Whatever  assets  a  bank  owns  in  excess  of  the  funds  in- 
vested by  its  stockholders  are  offset  by  an  equal  amount  of  liabil- 
ities to  the  public ;  therefore,  any  condition  which  seriously  disturbs 
the  banking  business  of  the  country  to  the  extent  of  entailing  loss 
or  impairing  general  business  must  be  borne  very  much  more  largely 
by  the  masses  than  by  the  banks ;  so  the  question  of  the  failure  of 
this  bill  to  provide  representation  for  the  banks  on  the  Federal 
Reserve  Board  is  one  which  in  the  last  analysis  is  of  vastly  more 
importance  to  the  people  than  it  is  to  the  bankers  themselves. 

The  manner  of  the  appointment  of  the  board,  together  with 
the  fact  that  three  members  of  the  President's  cabinet  would  be 
members  thereof,  provides  for  Administrative  control  as  well  as 
Governmental  control,  and  it  seems  to  me  inconceivable  that  the 
matter  could  be  kept  out  of  politics;  I  fail  to  see  how  it  would  be 
possible  to  keep  our  banking  system  from  becoming  a  political 
issue  every  presidential  election;  and  since  the  entire  business  of 


the  whole  country  of  every  kind  and  character  is  conducted  mainly 
through  the  wide  use  of  credit,  making  control  of  our  banking  sys- 
tem mean,  in  fact,  the  control  of  all  lines  of  business,  it  seems  to 
me  the  adoption  of  this  plan  would  be  certain  to  bring  disorder  and 
chaos  to  our  business  to  a  much  greater  extent  on  the  occasion  of 
future  presidential  elections  than  has  been  the -case  in  the  past. 

We  are  told  that  the  power  given  to  the  Federal  Reserve  Board 
for  the  control  of  our  banking  system  is  very  similar  to  that  given 
to  the  Interstate  Commerce  Commission,  but  the  fact  a  railroad  has 
the  right  of  appeal  to  a  court  provided  for  that  purpose  seems  to 
me  to  make  the  cases  entirely  dissimilar. 

In  discussing  the  bill  with  our  committee  of  bankers  who  visited 
Washington,  the  Administration  heads  disclaimed  any  intent  to 
have  the  Federal  Eeserve  Board  control  or  in  any  way  interfere 
with  the  conduct  of  the  Federal  Reserve  banks  to  the  extent  my 
remarks  would  imply,  yet  when  I  call  your  attention  to  some  of 
the  powers  given  to  that  board,  I  am  sure  you  will  agree  that 
very  little,  if  any  more,  power  would  be  necessary  to  give  that 
board  absolute  control  over  the  banking  business  of  the  country. 

The  following  are  some  of  the  specific  powers  given  to  the  Fed- 
eral Reserve  Board  by  the  bill : 

The  power  to  require  the  removal  of  the  officers  of  the 
Federal  Reserve  banks; 

The  power  to  suspend  further  operations  of  any  one  or  all 
of  the  Federal  Reserve  banks  and  appoint  a  receiver; 

The  power  to  make  and  promulgate  from  time  to  time 
regulations  governing  the  transfers  of  money,  and  the  power, 
if  it  so  chooses,  to  act  as  a  Clearing  House ; 

The  power  to  order  not  less  than  four  examinations  per 
year  of  banks  in  Central  Reserve  cities ; 

The  power  to  fix  the  salary  of  the  Federal  Reserve  Agent 
— such  salary  to  be  paid  by  the  Federal  Reserve  banks; 

The  power  of  removal  of  directors  of  a  certain  class  of 
Federal  Reserve  banks,  when,  in  their  opinion,  they  do  not 
represent  the  various  industries  of  that  district; 

The  power  to  use  their  discretion  to  admit  State  banks  to 
the  system; 

The  power  to  reject  members  once  they  are  admitted  to 
the  system; 

The  power  to  put  the  Comptroller's  office  under  the  juris- 
diction of  the  Secretary  of  the  Treasury  acting  as  chairman  of 
the  Federal  Reserve  Board ; 

The  power  to  add  to  the  number  of  Reserve  cities  and  the 
power  to  reclassify  existing  Reserve  cities; 

The  power  of  discretion  as  to  permitting  country  banks  to 
carry  5  per  cent  of  their  reserve  with  their  correspondents  in 
Reserve  cities  after  the  plan  has  become  operative; 


The  power  to  control  the  note  issue  with  power  to  grant 
or  to  refuse  to  grant  the  application  of  Federal  Reserve  banks 
for  same; 

The  power  to  cause  any  member  bank  of  a  Federal  Reserve 
Bank  to  be  examined  ; 

The  power  to  require  one  Federal  Reserve  Bank  to  redis- 
count for  another  Federal  Reserve  Bank; 

The  power  to  define  commercial  paper  which  shall  be  ad- 
missible for  rediscount  at  Federal  Reserve  Banks; 

The  power  to  suspend  for  a  period  not  exceeding  thirty  days 
and  to  renew  such  suspensions  for  periods  not  to  exceed  fifteen 
days  any  and  every  reserve  requirement  specified  in  the  Act. 

The  bill  originally  gave  the  Federal  Reserve  Board  the  power 
to  name  the  discount  rate  of  the  Federal  Reserve  banks  in  the 
various  districts  in  which  they  would  be  located,  but,  at  the  urgent 
request  of  the  committee  of  bankers,  they  modified  it  by  placing 
the  initiative  upon  the  Federal  Reserve  Bank  and  giving  the  Fed- 
eral Reserve  Board  the  right  of  approval. 

In  addition  to  all  of  these  especially  defined  powers,  the  bill 
provides  that  this  board  shall  have  the  right  to  perform  the  duties, 
functions,  or  services  implied  as  well  as  specified  in  this  act. 

I  do  not  believe  the  Administration  seeks  any  such  powers, 
therefore,  in  the  interest  of  the  passage  of  the  bill,  let  it  be  so  modi- 
fied as  to  restrict  the  powers  of  the  board  to  those  that  are  purely 
regulatory,  defining  fully  just  what  power  is  vested  in  the  board 
rather  than  to  leave  the  extent  of  its  activity  more  or  less  an  open 
question. 

The  committee  of  bankers  who  visited  Washington  asked  for 
representation  for  the  bankers  upon  the  Federal  Reserve  Board, 
through  having  that  board  enlarged  from  seven  to  eleven  members, 
the  additional  four  to  be  selected  by  the  President  from  a  list  of 
names  to  be  furnished  by  the  Federal  Reserve  banks,  each  bank  to 
furnish  one  name. 

This  would  give  the  Government  seven  out  of  the  eleven  members 
on  the  board,  and  I  can  see  no  good  reason  why  there  should  have 
been  any  objection  to  that  plan.  Failing,  however,  to  secure  repre- 
sentation on  the  board,  the  matter  might  be  adjusted  by  a  provision  in 
the  bill  for  the  appointment  of  an  Advisory  Board,  composed  of,  say, 
one  from  each  district  in  which  a  Federal  Reserve  Bank  would  be  lo- 
cated, three  of  which  should  have  the  right  to  sit  in  the  official  meetings 
of  the  Federal  Reserve  Board  and  report  its  actions  to  the  members 
of  the  Advisory  Board,  as  in  the  case  of  the  Advisory  Board  pro- 
vided for  in  the  Reichsbank  of  Germany;  but  even  with  the  adop- 
tion of  this  idea,  the  powers  of  the  Federal  Reserve  Board  should 
be  restricted  and  their  duties  fully  defined,  and  it  should  be  re- 
strained from  acting  beyond  such  authority  as  is  specifically  given 
to  it. 


The  bill  as  it  was  introduced  provided  for  treatment  of  the  Na- 
tional-Bank-United-States-bond-secured  notes  by  giving  the  National 
banks  the  right  to  present  to  the  Secretary  of  the  Treasury  in  any  one 
year  5  per  cent  of  the  2  per  cent  United  States  bonds  now  owned 
by  National  banks  and  held  by  the  Treasury  Department  to  secure 
their  circulating  notes  now  outstanding  and  receive  in  lieu  thereof  an 
equal  amount  of  3  per  cent  United  States  bonds  due  after  twenty 
years,  the  latter  to  carry  no  circulation  privileges. 

In  practice,  this  would  result  in  having  National  banks  reduce 
their  circulation  at  the  rate  of  5  per  cent  per  annum  for  twenty  years, 
at  the  end  of  which  time  all  National  Bank  notes  would  be  fully  retired 
from  circulation. 

The  original  so-called  ''Official''  bill  did  not  give  consideration 
to  our  National  Bank  notes,  the  section  covering  them  having  been 
dropped  from  the  tentative  bill  made  public  two  or  three  days  prior 
to  the  time  the  official  bill  was  given  out,  but  after  a  discussion  of 
the  matter  with  the  committee  of  bankers,  those  in  authority  rein- 
corporated it  in  the  bill. 

We  recommended  that  either  the  section  be  reincorporated  as  it 
had  been,  or,  preferably,  that  the  Government  should  actually  retire 
5  per  cent  or  approximately  $35,000,000  per  year  of  the  United  States 
2  per  cent  bonds — in  that  way  likewise  retiring  the  National  Bank 
notes  in  twenty  years. 

This  recommendation  was  made  for  the  reason  that  we  felt  there 
might  be  less  political  opposition  to  the  policy  of  paying  off  the  Gov- 
ernment 2  per  cent  bond  debt  at  the  rate  of  $35,000,000  per  year  than 
there  would  be  if  the  Government  were  to  increase  the  rate  of  inter- 
est on  the  $700,000,000  of  such  bonds. 

When  it  is  borne  in  mind  that  the  Government  has  been  the 
principal  beneficiary  as  a  result  of  the  low  rate  of  interest  at  which 
these  bonds  have  been  floated,  because  of  their  required  use  by 
National  banks  as  security  for  their  circulating  notes,  thereby  en- 
abling the  Government  to  save  millions  of  dollars  of  interest  annually, 
I  think  all  fair-minded  people  will  feel  that  there  is  an  obligation  on 
the  part  of  the  Government  to  protect  the  banks  against  loss  on  the 
bonds  so  held. 

Careful  consideration  of  this  subject  since  my  return  from 
Washington  leads  me  to  believe  that  any  plan  of  currency  legislation 
which  is  provided  should  either  employ  these  bonds  upon  some 
basis  which  will  protect  the  banks  from  loss,  or  it  should  take  them 
lap  and  pay  them  off,  or  refund  them  into  bonds  which  will  be  worth 
par  in  a  normal  market  for  securities. 

The  bill  also  provides  for  an  issue  of  Federal  Reserve  Treasury 
notes  not  to  exceed  $500,000,000,  and  in  addition  thereto  a  sum  equal 
to  the  difference  between  the  total  amount  of  National  Bank  notes  out- 
standing at  any  given  time  and  the  amount  of  such  notes  outstanding 
at  the  time  of  the  passage  of  the  bill. 


It  also  provides  that  these  notes  shall  purport  on  their  faces  to 
be  the  obligations  of  the  United  States  and  shall  be  issued  at  the  dis- 
cretion of  the  Federal  Reserve  Board  and  solely  for  the  purpose  of 
making  advances  to  Federal  Reserve  banks.  It  provides  that  they 
shall  be  receivable  for  all  taxes,  customs,  and  other  public  dues,  and 
shall  be  redeemed  in  gold,  on  demand,  at  the  Treasury  Department  in 
the  City  of  Washington,  District  of  Columbia,  or  at  any  Federal  Re- 
serve Bank. 

The  mode  of  procedure  through  which  these  notes  would  be  put 
into  circulation  would  be  that  any  Federal  Reserve  Bank  could,  upon 
a  vote  of  its  directors,  make  application  to  the  Federal  Reserve  Board 
through  the  local  Federal  Reserve  Agent,  for  such  amount  of  the 
Treasury  notes  as  it  might  deem  best,  such  application  to  be  accom- 
panied with  a  tender  to  the  local  Federal  Reserve  Agent  of  collateral 
security  to  protect  the  notes  for  which  application  is  made,  equal  in 
amount  to  the  sum  thus  applied  for,  the  collateral  security  thus 
offered  to  be  notes  and  bills  accepted  for  rediscount;  and  if  deemed 
advisable  the  Federal  Reserve  Board  would  be  authorized  at  any 
time  to  call  upon  a  Federal  Reserve  Bank  for  additional  deposits  of 
like  security.  Whenever  any  Federal  Reserve  Bank  shall  pay  out  or 
disburse  Federal  Reserve  Treasury  notes  it  shall  segregate  in  its  own 
vaults  and  shall  carry  to  a  special  account  on  its  books  gold  or  law- 
ful money  equal  in  amount  to  33%  per  cent  of  the  Treasury  notes 
so  paid  out  by  it.  The  Federal  Reserve  Board  shall  have  power, 
in  its  discretion,  to  require  Federal  Reserve  banks  to  maintain  on 
deposit  in  the  treasury  of  the  United  States  a  sum  in  gold  or  lawful 
money  equal  to  5  per  cent  of  such  amount  of  Federal  Reserve 
Treasury  notes  as  may  be  issued  to  them  from  time  to  time ;  but  such 
5  per  cent  shall  be  counted  and  included  as  part  of  the  33%  per  cent 
reserve  hereinbefore  required. 

In  addition  to  the  pledging  of  commercial  paper  to  the  extent 
of  the  par  value  of  the  amount  of  notes  thus  received  by  any  Federal 
Reserve  Bank,  such  notes  when  paid  out  by  that  bank  would  become 
a  first  and  paramount  lien  on  all  of  its  assets.  Thus  you  will  see  that 
these  notes  would  be  secured,  first,  by  the  credit  of  the  Government, 
and,  second,  by  a  specific  deposit  by  the  Federal  Reserve  Bank  of 
commercial  paper  equal  to  the  amount  of  notes  received,  and,  third, 
when  paid  out  for  a  Federal  Reserve  Bank  they  become  a  first  and 
paramount  lien  on  all  of  the  assets  of  that  bank. 

Believing  that  the  bank-note  issue,  as  proposed  in  the  bill,  is 
neither  sound  nor  scientific  from  the  standpoint  of  modern  banking, 
the  committee  of  bankers  who  called  upon  the  President  suggested  an 
entire  change  in  the  manner  of  issue  and  a  somewhat  different  method 
of  securing  these  notes.  We  held  that  the  Government  should  not 
guarantee  nor  undertake  the  responsibility  of  the  redemption  of  the 
notes  issued,  for  since  they  would,  even  under  the  plan  proposed  in 
the  bill,  be  abundantly  secured,  it  seemed  to  us  entirely  unnecessary 
that  they  should  bear  the  promise  of  the  Government  to  redeem  them 
in  gold;  especially  so,  since  under  the  proposed  plan  the  real  burden 

10 


and  responsibility  of  maintaining  the  necessary  gold  reserve  against 
them  is  placed  upon  the  Federal  Reserve  banks.  Our  reasons  for  this 
were  based  upon  the  theory  that  it  would  be  putting  an  unnecessary 
responsibility  and  burden  upon  the  Government  and  one  which  might 
cause  embarrassment. 

If  the  notes  were  the  obligation  of  the  Federal  Reserve  banks 
alone,  and  properly  secured,  any  emergency  which  could  possibly 
cause  a  default  in  the  payment  of  gold  would  not  affect  the  credit 
of  the  Government  and  would  leave  it  free  and  unhampered  to  use 
its  influence  and  prestige  to  bring  about  stability,  whereas,  if  the 
promise  of  the  Government  to  redeem  these  notes  in  gold  should  be 
linked  with  that  of  the  Federal  Reserve  Banks  and  a  default  should 
occur  neither  would  be  free  to  assist  the  other. 

In  case  of  war  with  a  foreign  nation  making  it  necessary  for  the 
Government  to  use  its  credit  freely,  its  guarantee  of  the  payment  of 
these  notes  in  gold  would,  no  doubt,  impair  its  ability  to  borrow  on 
the  most  advantageous  basis,  and  it  would  at  the  same  time,  through 
so  materially  increasing  its  obligations,  cause  more  or  less  apprehen- 
sion concerning  such  outstanding  notes;  and  if  a  condition  should  be 
created  through  which  the  public  would  doubt  the  ability  of  the 
Government  to  pay  gold  against  these  notes,  gold  would  be  hoarded 
and  the  notes  would  depreciate  in  value.  Furthermore  than  this,  the 
manner  in  which  they  must  be  gotten  into  circulation  is  unscientific 
and  would  have  a  tendency  for  inflation,  for  any  plan  which  does  not 
force  immediate  automatic  redemption  of  a  bank  note,  once  it  has 
served  its  purpose,  is  built  upon  a  wrong  premise. 

Much  confusion  regarding  bank  notes  is  created  through  the  fact 
that  many  regard  them  as  money.  This  is  a  fallacy,  for  nothing  could 
be  further  from  the  truth;  they  are,  in  fact,  only  instruments  of 
credit  given  such  form  that  the  public  will  know  they  are  secured 
and  are  generally  accepted  as  a  circulating  medium;  they  perform 
the  same  functions  as  a  check,  and  if  they  are  effective  and  are  out- 
standing only  to  the  extent  of  the  requirements  of  business,  they, 
like  checks,  should  be  cancelled  when  paid. 

Instead  of  the  plan  as  proposed  in  the  bill,  we  recommended  that 
the  notes  should  be  issued  by  the  Federal  Reserve  banks,  each  note  to 
be  similar  in  appearance,  but  that  each  should  bear  upon  its  face  the 
number  of  the  issuing  bank.  We  proposed  to  make  it  the  duty  of 
one  Federal  Reserve  Bank  to  daily  charge  to  the  account  of,  cancel 
and  send  to  each  of  the  other  Federal  Reserve  banks,  notes  received 
by  it  in  any  day's  business.  Thus,  bank  No.  1  would  daily  cancel  and 
send  to  the  other  eleven  Federal  Reserve  banks  all  their  notes  re- 
ceived that  day,  and  the  other  eleven  banks  would  in  like  manner 
charge  to  the  account  of,  cancel  and  send  to  Federal  Reserve  Bank 
No.  1  all  of  its  notes  received  by  them  in  any  one  day.  In  this  man- 
ner there  would  be  a  constant,  automatic  redemption  of  notes 
outstanding,  and  no  more  notes  could  be  kept  out  than  the  exact 
amount  necessary  for  the  transaction  of  our  business. 

11 


The  fact  that  the  National-Bank-United-States-bond-secured 
notes  have  been  so  rigid  and  not  at  all  elastic  has  caused  many  to  be- 
come confused  into  regarding  them  as  money  rather  than  instruments 
of  credit,  and  the  inelasticity  of  the  notes  has  caused  us  to  experi- 
ence alternating  seasons  of  stringency  or  redundancy  in  our  currency, 
depending  upon  conditions  in  business  and  the  state  of  public  con- 
fidence. 

We  proposed  that  any  Federal  Reserve  Bank  to  issue  these  notes 
should  carry  a  50  per  cent  gold  reserve  against  its  liabilities  of  all 
kinds  (being  16%  per  cent  more  gold  than  is  required  in  the  plan 
proposed  in  this  bill)  and  that  the  said  notes  should  be  secured  by  the 
liquid  assets  of  the  issuing  bank,  thus  becoming  a  first  lien  on  all  its 
assets.  In  addition  thereto,  they  would  have  behind  them  the  stock- 
holders' double  liability,  and  even  beyond  this  should  be,  subject  to 
the  notes  issued  by  such  banks,  a  first  lien  on  the  assets  of  all  the 
other  Federal  Reserve  banks. 

It  is  inconceivable  that  a  bank  note  could  be  better  secured,  and 
this  sort  of  note,  while  being  equally  as  safe  as  the  one  proposed  in  the 
bill,  would  not  in  any  way  entail  any  liability  upon  the  Government ; 
and  in  the  event  of  a  default  in  the  payment  of  gold  against  such 
notes  the  credit  of  the  Government  could  not  in  any  wise  be  affected, 
thus  leaving  it  in  the  attitude  of  being  most  powerful  to  restore  order. 

"We  believe  that  the  theory  of  taxing  notes  to  enforce  their  re- 
demption is  wrong  in  principle  and  practice,  and  as  a  substitute  for 
this  plan  and  with  a  view  of  securing  a  system  which  would  prevent 
inflation,  we  suggested  that  a  Federal  Reserve  bank  should  issue 
notes  without  tax  so  long  as  it  should  maintain  a  50  per  cent 
gold  reserve  against  its  total  liabilities,  including  deposits, 
but  that  such  notes  as  it  should  have  outstanding  when  its 
gold  reserves  would  fall  below  50  per  cent  should  be  taxed  at  the 
rate  of  li/^  per  cent  for  each  21/^  per  cent  its  gold  reserve 
should  fall  under  50  per  cent  down  to  33%  per  cent.  In 
practice  this  would  mean  that  a  Federal  Reserve  Bank  would  have 
to  pay  a  tax  on  its  outstanding  notes  of  II/2  P^r  cent  when  its  gold 
reserve  would  be  471/2  P^r  cent;  6  per  cent  when  its  reserve  should 
drop  to  40  per  cent,  and  10%  per  cent  when  its  reserve  would  fall 
to  33%  per  cent;  it  to  be  prohibited  from  issuing  notes  when  the 
reserve  would  fall  below  that  point. 

We  believe  this  to  be  the  scientific  and  the  most  practical  way  in 
which  to  enforce  an  automatic  redemption  of  bank  notes. 

The  bill  under  discussion  gives  to  the  Federal  Reserve  Board  the 
power  to  require  a  tax  upon  circulation  if  in  its  judgment  it  is  deemed 
best.  What  would  be  the  situation  if  a  member  bank  of  a  Federal 
Reserve  Bank,  after  having  discounted  paper  with  it,  should  ask 
for  one  or  two  million  dollars  of  bank  notes  to  send  to  its  correspond- 
ents in  the  country  to  be  used  for  crop-moving  or  other  purposes  and 
the  Federal  Reserve  Bank  would  have  an  excess  of  gold  reserve  at  the 
time?  Do  you  suppose  the  manager  of  that  bank  would  be  willing  to 
pay  a  tax  of  any  rate  upon  bank  notes  simply  for  the  purpose  of 

12 


accommodating  the  member  bank?  Instead  of  so  doing,  do  you  not 
think  that  he  would  say  to  that  bank  that  it  would  be  expensive  to 
furnish  these  notes  and  insist  upon  it  taking  gold  instead?  This  fol- 
lowed to  its  finality  would  mean  the  ultimate  scattering  of  vast  sums 
of  gold  throughout  the  country,  whereas,  the  whole  theory  of  the 
necessity  for  currency  legislation  is  based  upon  the  necessity  for 
mobilizing  these  gold  reserves. 

I  claim  that  there  should  be  no  limit  on  the  amount  of  bank  notes 
that  can  be  issued,  leaving  that  to  be  determined  by  the  requirements 
of  business  rather  than  upon  the  guess  of  anyone,  for  who  can  tell 
today  what  our  requirements  in  business  for  bank  notes  will  be  in  five 
or  ten  years? 

Removing  the  limit  as  to  the  maximum  amount  of  issue  and  pro- 
tecting us  from  inflation  by  taxing  the  deficiency  in  gold  reserve  as  it 
falls  under  50  per  cent,  along  the  lines  I  have  already  stated,  and 
then  making  provision  for  such  automatic  redemption  as  I  have  indi- 
cated, instead  of  enforcing  redemption  by  taxation,  would  give  us  a 
bank-note  issue  that  would  be  scientific  and  be  out  in  circulation  in 
exactly  the  amount  necessary  to  serve  the  requirements  of  business, 

Our  suggestions  for  changes  in  this  respect  did  not  meet  with 
favorable  consideration,  for  the  reason,  as  we  were  told,  that  there 
is  a  wing  of  the  Democratic  party  the  members  of  which  are  firm  in 
their  conviction  the  Government  should  issue  all  bank  notes  or 
** money,"  as  they  expressed  it;  so  our  recommendations  fell  upon 
barren  soil  notwithstanding  our  earnest  pleadings. 

I  maintain  that  the  plan  for  issuing  bank  notes  as  proposed  by 
our  committee  is  immeasurably  better  than  that  embodied  in  the  plan 
provided  for  in  the  bill. 

An  important  section  of  the  bill  is  that  which  relates  to  the  re- 
serves of  the  member  banks  of  the  proposed  Federal  Reserve  banks,  or 
our  present  banking  institutions. 

Under  existing  conditions,  the  National  banks  in  the  country 
towns  and  cities  outside  of  Reserve  cities  are  required  to  carry  reserves 
of  15  per  cent,  two-fifths  of  which,  or  6  per  cent,  must  be  in  cash  in 
their  vaults,  and  the  other  three-fifths,  or  9  per  cent,  may  be  carried 
with  their  correspondents  in  Reserve  cities. 

Under  the  proposed  law,  it  is  provided  that  within  sixty  days 
from  and  after  the  date  when  the  Secretary  of  the  Treasury  shall 
have  officially  announced  the  fact  that  a  Federal  Reserve  Bank  has 
been  established,  every  National  Banking  Association,  as  well  as  State 
banks  which  become  members,  shall  establish  with  the  Federal  Reserve 
Bank  of  its  district  a  credit  balance  on  the  books  of  that  bank  equal  to 
not  less  than  3  per  cent  of  its  own  total  demand  liabilities,  exclusive  of 
circulating  notes,  and  at  the  end  of  fourteen  months  from  the  date 
fixed  by  the  Secretary  of  the  Treasury  shall  increase  the  said  3  per 
cent  to  5  per  cent;  such  balance  may  at  any  time  be  increased,  but 
at  no  time  shall  it  be  allowed  to  fall  below  the  amounts  aforesaid. 

From  and  after  the  date  set  by  the  Secretary  of  the  Treasury 
and  officially  announced  by  him,  it  shall  be  the  duty  of  member  banks 

13 


now  classified  as  ''country"  banks  and  situated  outside  of  Central 
Reserve  and  Reserve  cities,  to  maintain  a  reserve  equal  to  15  per  cent 
of  the  aggregate  amount  of  their  deposits.  Such  reserves  shall  con- 
sist of  5  per  cent  of  lawful  money  held  actually  in  their  own  vaults, 
and  for  a  period  of  fourteen  months  from  the  date  aforesaid  shall  con- 
sist of  at  least  3  per  cent,  and  thereafter  of  at  least  5  per  cent,  with 
its  district  Federal  Reserve  bank.  The  remainder  of  the  15  per  cent 
reserve  required  may,  for  a  period  of  36  months  from  and  after  the 
date  set  by  the  Secretary  of  the  Treasury,  consist  of  balances  due 
from  National  banks  in  Reserve  or  Central  Reserve  cities,  as  now 
defined  by  law. 

From  and  after  a  date  thirty-six  months  subsequent  to  the  date 
set  by  the  Secretary  of  the  Treasury,  the  said  remainder  of  the  re- 
quired reserve,  or  5  per  cent,  shall  consist  either  of  lawful  money 
in  their  own  vaults,  or  of  balances  on  deposit  with  the  Federal  Reserve 
Bank  in  the  district  in  which  they  are  located,  or  both,  the  provision 
having  been  made  that  the  Federal  Reserve  Board  may,  in  its  discre- 
tion, permit  such  remainder,  or  5  per  cent,  of  the  reserve  required  to 
consist  of  balances  on  deposit  with  banks  in  Reserve  or  Central  Reserve 
cities  as  defined  by  law.  In  other  words,  after  the  plan  has  become 
fully  operative,  the  so-called  * '  country ' '  bank  members  of  the  Federal 
Reserve  Bank  of  any  district  will  be  obliged  to  carry  5  per  cent  of 
their  15  per  cent  reserve  in  lawful  money  in  their  vaults,  5  per  cent 
with  the  Federal  Reserve  Bank,  and  the  remn^Tiiner  5  per  cent  wherever 
the  Federal  Reserve  Board  in  its  discretion  may  require. 

Banks  in  Reserve  and  Central  Reserve  cities  will  be  required 
during  a  period  of  thirty-six  months  to  so  adjust  their  reserves  that 
at  the  end  of  that  period  they  will  be  carrying  10  per  cent  in  gold 
or  lawful  money  in  their  own  vaults  and  an  additional  10  per  cent  to 
their  credit  with  the  Federal  Reserve  banks. 

A  careful  study  of  the  bill  will  disclose  the  fact  that  the  purpose 
of  those  who  prepared  it  is  to  re-distribute  present  bank  reserves,  re- 
turning them  to  the  section  of  the  country  from  whence  they  came.  It 
will,  of  course,  be  apparent  that  this,  interpreted,  means  a  desire  to  de- 
centralize the  reserves  now  held  in  the  centers.  Why  this  should  be 
done  or  what  good  is  to  be  accomplished  by  it  I  do  not  know,  but  I 
have  reason  to  believe  it  has  as  its  basis  a  desire  to  stifle  speculation 
and,  more  specifically,  to  prevent  the  flow  of  money  to  New  York  to 
be  loaned  in  Stock  Exchange  transactions.  It  may  be  possible  that 
to  pass  a  law  determining  the  question  of  where  and  how  bank  re- 
serves are  to  be  carried  will  change  human  nature,  but  I  do  not 
believe  it. 

Speculation  will  exist  so  long  as  the  desire  for  gain  is  inborn  in 
the  human  race,  and  since  business  is  a  means  through  which  gain  is 
sought,  speculation  will  exist  as  long  as  business  exists;  all  the  legis- 
lation in  Christendom  cannot  stop  it.  You  may  try  to  regulate  it  by 
attempting  to  regulate  the  business  which  is  most  inclined  to  breed 
speculation,  but  destroy  it,  never. 

14 


If  a  proper  system  of  currency  and  banking  is  adopted  and  there 
is  established  in  the  United  States  an  open  market  for  commercial 
paper,  most  of  the  evils  that  it  is  alleged  are  created  through  the 
concentration  of  capital  in  the  centers  will  disappear,  for  the  banks  of 
the  country  are  now  forced  to  resort  to  Stock  Exchange  loans  be- 
cause that  is  the  only  avenue  through  which  it  is  possible  for  them 
to  secure  liquid  paper  upon  which  funds  can  be  immediately  collected. 

The  maintenance  of  a  broad,  open  market  for  commercial  paper 
and  bills  of  exchange  would  soon  draw  to  that  market  the  major  por- 
tion of  the  money  of  out-of-town  banks  that  has  been  employed  in  the 
carrying  of  Stock  Exchange  loans ;  therefore,  why  disturb  the  reserve 
relations  between  banks  so  violently,  and  without  any  definite  knowl- 
edge of  what  effect  it  may  have  upon  business  ? 

The  original  official  plan  had,  as  its  basis,  a  reserve  requirement 
as  follows : 

For  country  banks,  or  banks  outside  of  Reserve  cities,  15  per 
cent,  which  amount  after  thirty-six  months  should  consist  of  7% 
per  cent  in  lawful  money  in  their  vaults  and  7%  per  cent  to  their 
credit  in  Federal  Reserve  banks. 

For  Reserve  and  Central  Reserve  cities,  20  per  cent  was  re- 
quired, 10  per  cent  of  which  would  consist  of  lawful  money  in  their 
vaults  and  10  per  cent  to  their  credit  with  the  Federal  Reserve  Bank. 

The  committee  of  bankers,  feeling  that  the  framers  of  the  bill 
had  not  given  careful  enough  consideration  to  the  natural  trend  of 
the  exchanges  of  the  country  and  the  necessities  for  leaving  them  free 
and  unhampered,  and  believing  the  shifting  of  the  reserves  as  pro- 
vided for  in  the  bill  would  work  a  great  hardship  upon  the  busi- 
ness of  the  country  through  impairing  the  ability  of  banks  to  furnish 
credit  facilities  to  their  customers,  recommended  to  the  administration 
heads  that  their  bill  be  amended  so  that  Country  banks  should  con- 
tinue to  carry  15  per  cent,  the  banks  in  Reserve  cities  18  per  cent, 
and  those  in  Central  Reserve  cities  20  per  cent. 

It  was  also  recommended  that  in  the  case  of  the  country  banks 
5  per  cent  of  this  amount  should  be  in  lawful  money  in  their  vaults, 
3  per  cent  to  stand  to  their  credit  with  the  Federal  Reserve  banks, 
and  the  balance  of  7  per  cent  either  in  their  own  vaults,  to  their 
credit  in  the  Federal  Reserve  Bank,  or  with  other  correspondents 
in  Reserve  cities,  as  they  might  elect.  In  the  case  of  banks  in  Re- 
serve cities  it  was  proposed  that  6  per  cent  of  the  18  per  cent  should 
be  carried  in  lawful  money  in  their  vaults,  6  per  cent  to  their  credit 
with  Federal  Reserve  banks  and  6  per  cent  in  either  their  vaults, 
with  the  Federal  Reserve  Bank,  or  with  their  correspondents  in 
Central  Reserve  cities,  as  they  should  elect. 

In  the  case  of  Central  Reserve  cities  it  was  proposed  that  one- 
half  of  the  reserve  of  20  per  cent  should  be  carried  in  their  vaults 
in  lawful  money  and  one-half  to  their  credit  in  the  Federal  Reserve 
banks. 

We  made  long  and,  as  we  believed,  logical  arguments  for  these 
modifications,   and  we  left  Washington  believing  that  they  would 

15 


be  made;  but  the  draft  of  the  bill  I  have  received  does 
not  embody  them.  It  shows  that  after  thirty-six  months,  one-third, 
or  5  per  cent,  of  the  15  per  cent  reserve  required  of  country  banks 
may,  at  the  discretion  of  the  Federal  Reserve  Board,  be  continued  with 
their  correspondents  in  Reserve  cities,  qualifying  their  right  to  do  so 
and  giving  the  Federal  Reserve  Board  still  further  administrative  pow- 
ers instead  of  restricting  them  as  should  be  the  case.  I  do  not  see  that 
any  provision  is  made  that  will  allow  any  of  the  reserves  of  Reserve 
City  banks  to  consist  of  their  balances  in  Central  Reserve  cities. 

I  contend  this  drastic  and  wholesale  shifting  of  reserves  from 
the  natural  centers  where  the  requirements  of  business  have  caused 
them  to  flow  automatically,  will  disturb  business  and  greatly 
impair  the  ability  of  the  public  to  secure  credit  accommodations. 

If  none  of  the  balances  in  Reserve  City  banks  are  to  be  counted 
as  reserve  it  naturally  follow^s  that  in  time  these  balances  will  be 
withdrawn;  especially  so  since  the  plan  is  so  drawn  as  to  encour- 
age the  members  to  do  most  of  their  business  with  the  Federal  Re- 
serve banks.  Consequently,  we  are,  I  think,  justified  in  the  belief 
that  in  due  time  this  business  would  practically  be  forced  into  the 
Federal  Reserve  banks. 

Framers  of  the  bill  claim  that  the  relationship  which  would  exist 
between  the  banks  of  the  country  and  the  Federal  Reserve  banks, 
combined  with  the  shifting  of  reserves,  would  enable  the  public  to 
secure  a  greater  amount  of  credit  than  is  now  extended  to  it  by  exist- 
ing banks,  but  I  am  unable  to  confirm  this  opinion  unless  it  should 
contemplate  almost  unlimited  discounting  with  the  Federal  Reserve 
banks  by  their  members. 

As  a  concrete  case,  take  my  own  bank.  Under  normal  condi- 
tions we  have  balances  from  our  correspondents  of  over  $100,000,000. 
If  none  of  these  balances  can  be  counted  as  reserves  by  our  corre- 
spondents and  they  are  forced  to  carry  them  with  the  Federal  Re- 
serve banks,  does  it  not  follow  that  we  may  ultimately  lose  that  amount 
in  bank  or  reserve  deposits?  We  usually  carry  cash  means  of  40  per 
cent  of  our  gross  deposits,  so  that  a  $100,000,000  deposit  gives  us  a 
loaning  power  of  $60,000,000.  To  take  away  from  the  banks  of  Chi- 
cago the  reserves  thus  carried  by  its  banks  for  their  correspondents,  or 
$200,000,000,  would  decrease  their  loaning  ability  $120,000,000.  In 
like  manner,  take  away  from  New  York  City  banks  $240,000,000  in 
deposits  of  this  character  and  you  would  reduce  the  loaning  power  of 
the  banks  of  that  city  $180,000,000. 

^  Add  to  this  the  disturbance  of  business  that  would  be  caused  by  a 
similar  and  proportionate  shrinkage  in  the  ability  of  banks  in  nearly 
fifty  other  Reserve  cities  and  in  country  banks  to  furnish  credit  to 
their  customers  and  you  will  get  some  idea  of  the  effect  this  ''re- 
distribution" of  reserves  will  have  upon  general  business.  We  are  told 
that  this  shrinkage  in  our  loaning  power  is  to  be  offset  by  the  right  of 
member  bapks  to  rediscount  with  the  Federal  Reserve  Bank. 

Now,  if  we,  in  our  bank,  should  carry  a  continuous  line  of  re- 
discounts with  the  Federal  Reserve  Bank  equal  to  our  capital,  we 

16 


would,  in  the  event  we  should  lose  our  bank  balances,  still  be  obliged 
to  reduce  our  loans  forty  million  dollars. 

In  order  to  continue  to  extend  the  same  amount  of  credit  to 
our  customers  that  we  now  do,  my  bank  would  be  obliged  to  carry 
with  the  Federal  Reserve  Bank  of  our  district  rediscounts  in  an 
amount  equal  to  two  and  one-half  times  our  capital  stock.  Can  you 
conceive  that  there  is  a  banker  in  the  country,  worthy  of  the  name, 
who  would  think  of  assuming  such  an  enormous  responsibility,  taking 
the  risk  of  loss  incident  to  carrying  such  a  large  line  of  loans  simply 
because  he  could  loan  more  money  than  he  would  have,  or  to  assure 
the  success  of  a  system  of  banking  which  would  give  the  Government 
the  major  portion  of  the  profits  of  such  transactions?  A  system  of 
banking,  the  success  of  which  would  require  that  banks  dealing  with 
the  public  should  carry  excessive  lines  of  rediscounts  continuously, 
would  prevent  our  having  the  much  needed  elasticity  in  our  credits, 
and  would  defeat  the  chief  purpose  of  legislation  on  this  sub,i':»ct 

It  is  only  by  running  without  rediscounts,  or  at  least  with  the 
average  of  rediscounts  at  a  low  level,  that  the  banks  operating  under 
our  system  can  insure  a  proper  elasticity  in  credit.  The  larger  and 
maximum  lines  should  never  be  taken  except  in  emergencies  when 
an  unusual  amount  of  credit  or  bank  notes  is  needed  to  serve  the 
public,  and  then  such  lines  should  be  reduced  to  the  minimum  as  soon 
as  possible. 

If  the  reserves  of  all  of  the  National  banks  in  the  country,  other 
than  those  carried  in  their  vaults  and  as  provided  in  this  bill,  should 
be  forced  into  the  Federal  Reserve  banks,  it  would  require  that  there 
should  be  ultimately  deposited  with  those  banks,  as  reserves,  the 
following  amounts : 

10  per  cent  of  the  $3,390,000,000  of  Country 
bank  deposits,  or $339,000,000 

10  per  cent  of  $1,933,000,000,  the  deposits  of 

ordinary  Reserve  cities,  or 193,000,000 

10  per  cent  of  $1,725,000,000,  the  deposits  of 

Central  Reserve  cities,  or 172,000,000 

Total  reserve  of  banks  that  would  be  required 
to  be  on  deposit  with  the  Federal  Reserve 

banks   $704,000,000 

In  the  event  that  under  the  discretionary  powers  of  the  Federal 
Reserve  Board  5  per  cent  of  the  required  reserves  of  the  Country 
banks,  or  banks  outside  of  Reserve  cities,  should  be  allowed  to  con- 
sist of  balances  with  their  correspondents  in  Reserve  cities,  it  would 
reduce  the  amount  of  the  deposits  it  would  be  necessary  for  the  banks 
to  make  with  the  Federal  Reserve  Agent  $169,000,000,  leaving  the 
total  in  one  instance  $704,000,000  and  in  the  other  $535,000,000. 

Add  to  this  the  $100,000,000  which  the  National  banks  of  the 
country  would  be  obliged  to  subscribe  as  capital  to  the  Federal  Re- 
serve banks  and  it  would  make  a  total  in  one  instance  of  $804,000,000 
and  in  the  other  of  $635,000,000. 

17 


Deduct  from  these  amoTints  $215,000,000  that  will  be  released 
on  account  of  the  reduction  of  reserves  required  of  banks  in  Reserve 
and  Central  Reserve  cities,  and  you  will  have  $589,000,000  in  one 
instance  and  $420,000,000  in  the  other,  which  the  banks  of  the  coun- 
try would  have  to  give  up  in  cash  or  its  equivalent. 

It  is  only  a  simple  problem  in  mathematics  for  you  to  ascertain 
how  much  the  National  banks  of  the  country  will  have  to  contract 
their  loans  when  this  amount  is  withdrawn  from  them.  After  having 
arrived  at  a  conclusion  on  that  point,  you  will  readily  see  how  much 
the  aggregate  rediscounts  of  the  National  banks  with  the  Federal 
Reserve  banks  will  have  to  be  to  prevent  a  serious  contraction  in 
loans. 

Then,  too,  under  this  distribution  of  reserves,  where  would  our 
large  borrowers  go  for  credit?  The  banks,  through  carrying  their 
reserves  in  the  centers,  furnish  the  largest  volume  of  deposits 
against  the  smallest  percentage  of  loans,  while  corporations,  indi- 
viduals, and  firms  who  are  borrowers,  furnish  the  smallest  percentage 
of  deposits  to  the  largest  percentage  of  demand  for  loans. 

Take  away  the  reserves  we  now  carry  for  our  correspondents 
and  you  take  away  our  ability  to  furnish  large  amounts  of  money 
to  one  borrower.  Where,  then,  will  those  who  require  large  amounts 
of  money  for  the  conduct  of  legitimate  business  go  to  secure  their 
accommodations  ? 

To  my  mind,  this  is  a  subject  that  concerns  the  business  man 
much  more  than  it  does  the  banker ;  especially  since,  as  I  have  before 
stated,  the  effects  of  whatever  changes  are  made  must  ultimately  fall 
upon  and  be  borne  by  the  people. 

I  do  not,  of  course,  assume  to  believe  the  passage  of  this  bill 
would  take  away  all  of  our  bank  balances,  because  most  bankers 
carry  cash  means  largely  in  excess  of  their  legal  requirements,  and, 
besides,  many  of  our  correspondents  may  not  join  the  system;  in 
which  event  their  balances  would  remain  undisturbed.  I  cannot, 
therefore,  tell  definitely  to  what  extent  out  deposits  would  be  affected 
by  the  adoption  of  the  plan  embodied  in  the  bill;  no  more  can  the 
framers  of  the  bill  know. 

The  plan  suggested  by  the  committee  of  bankers  contemplated  a 
reduction  of  the  amount  of  reserves  carried  by  banks  with  their 
correspondents  by  over  one-half,  as  it  seemed  to  us  that  to  require  a 
greater  distribution  of  the  reserves  at  once,  or  during  the  time  the 
plan  is  being  perfected,  would  be  more  drastic  than  is  necessary  and 
would  do  more  harm  to  business  than  it  could  possibly  do  good.  Why 
should  it  not  be  given  a  trial  upon  that  basis  for  a  few  years  and  see 
what  effect  it  would  have  upon  business,  leaving  a  further  modifica- 
tion to  some  future  time  when  it  could  be  made  with  the  certainty 
that  it  would  not  have  any  bad  effect  upon  business,  instead  of 
legalizing  an  Act  so  revolutionary,  upon  the  mere  guess  of  anyone 
as  to  how  it  would  affect  the  business  of  our  country  and  the  conse- 
quent prosperity,  welfare,  and  happiness  of  our  millions  of  people? 

18 


To  say  you  want  to  decentralize  the  concentration  of  credits  in 
the  centers  sounds  very  well,  and  it  is  a  popular  *' catch-phrase " 
with  those  whose  desire  for  currency  legislation  is  measured  by  their 
prejudice  against  and  their  desire  to  punish  what  has  become  popu- 
larly known  as  ' '  Wall  Street. ' ' 

Without  undertaking  to  discuss  the  merits  of  the  criticisms  of 
Wall  Street,  which  criticisms  I  believe  are  largely  responsible  for  what- 
ever prejudice  exists  in  this  direction,  I  want  to  say  that  patriotism, 
honesty,  integrity,  good  citizenship  and  fair-dealing  can  neither  be 
made  nor  destroyed  by  the  mere  passage  of  laws,  and  I  cannot  refrain 
from  saying  to  those  who  will  be  responsible  for  the  enactment  of  this 
law  that  it  will  be  just  as  impossible  to  pass  legislation  of  a  financial 
nature  that  will  punish  Wall  Street  without  punishing  in  a  propor- 
tionate measure  every  city,  town,  and  hamlet  in  the  whole  country, 
as  it  would  be  impossible  to  pass  a  law  which  could  force  a  change  in 
the  law  of  gravity. 

You  can  regulate  and  supervise,  but  when  you  try  to  bring  about 
an  entire  change  from  those  natural  conditions  created  by  the  develop- 
ment, growth  and  natural  trend  of  our  business  and  commerce,  you 
are  undertaking  a  task  fraught  with  great  danger.  Wherever  large 
numbers  of  people  congregate  and  large  amounts  of  wealth  assemble, 
those  people  and  that  wealth  will  wield  a  proportionate  influence. 
Legislation  on  thfs,  as  well  as  every  subject,  should  be  free  from  all 
prejudice  and  animus  and  have  as  its  basis  equity  and  justice. 

The  bill  provides  for  practically  the  same  use  of  reserves  as  at 
present,  but  it  requires  the  transfer  of  these  reserves  from  the  banks 
now  holding  them  to  the  Federal  Reserve  banks, — reserves  that  the 
banks  have  been  accumulating  during  50  years  of  competitive  bank- 
ing,— and  by  the  provisions  of  this  bill  it  is  now  proposed  to  require 
their  transfer  within  three  years  to  another  kind  of  a  bank  to  be  organ- 
ized where  they  will  still  be  used  in  a  similar  manner.  As  bankers, 
we  are  not  opposed  to  this,  if,  by  giving  up  this  business,  we  can  feel 
that  the  full  purposes  of  this  legislation  will  be  accomplished  and 
that  there  will  be  provided  a  proper  safeguard  against  future  violent 
depressions  in  business  or  panics  and  that  our  organization  of  credit 
will  be  free  from  the  frequent  disturbances  which  we  have  experienced 
in  recent  years  under  our  present  law.  I  believe  the  purposes  for 
which  financial  legislation  is  to  be  enacted  will  be  better  served  by  the 
transferring  from  existing  banks  to  the  Federal  Reserve  banks,  at 
the  start,  of  only  about  one-half  of  the  reserves,  as  that  would  make 
changes  in  business  less  radical  and  less  revolutionary  than  would 
be  the  case  if  there  should  be  an  early  transfer  of  all  of  these  reserves 
to  those  banks. 

This  would  not  cause  any  delay  in  the  establishment  of  the  Federal 
Reserve  banks,  nor  would  it  prevent  them  from  developing  their 
business. 

All  that  is  good  is  not  confined  to  any  one  class  of  men  any  more 
than  all  that  is  bad  is  confined  to  any  other  class.    Human  nature  is 

19 


about  the  same  in  all  classes  of  people,  and  under  the  law  of  averages 
the  good  and  the  bad  are  fairly  well  distributed  among  the  different 
classes.  The  bankers,  as  a  class,  are  neither  better  nor  worse  than  a 
similar  number  of  people  comprising  other  classes,  but  they  rank  high, 
in  comparison  with  any  other  class,  in  their  standard  of  good  citizen- 
ship and  fair  dealing.  There  may  be  warrant  for  criticism  of  some 
of  the  conditions  that  exist  and  the  things  that  are  done  in  Wall 
Street,  as  there  is,  no  doubt,  warrant  for  criticism  of  some  of  the 
things  done  in  other  centers.  I  believe,  however,  much  of  this  prej- 
udice is  due  to  a  misapprehension  on  the  part  of  the  public  who 
regard  a  certain  class  of  operators  in  the  Stock  Market  as  bankers. 

While  this  class  is  not  large  in  numbers,  the  use  by  them  of  the 
word  ** brokers"  is  a  defamation  of  that  term  as  it  is  understood  by 
the  average  legitimate  broker,  quite  as  much  as  the  use  of  the  word 
*' banker"  on  their  letterheads  is  a  defamation  of  legitimate  bank- 
ing ;  and  I  hope  that  legislators  will  not  charge  to  the  bankers  of  the 
country  anything  which  this  class  of  men  say  or  do  for  the  purpose 
of  influencing  Stock  Exchange  transactions. 

All  I  ask  is  that  public  opinion  shall  not  place  the  sins  of  others 
on  the  heads  of  reputable  bankers.  Hold  all  guilty  of  wrongdoing  to  a 
strict  accountability  of  their  actions,  and  when  the  public  is  thought 
to  be  outraged  by  the  action  of  some  man,  firm,  or  corporation,  make 
your  criticisms  against  the  guilty  ones  and  not  against  the  class  to 
which  they  belong  or  to  which  they  would  have  you  believe  they  be- 
long. There  should  be  no  indiscriminate  class  criticism,  but  if  criti- 
cism must  be  made  let  it  be  directed  against  the  wrongdoer. 

I  fear  that  such  prejudice  against  bankers  as  has  been  created 
exists  as  the  result  of  confusing  the  banking  business  with  Stock  Ex- 
change transactions  conducted  by  such  men  as  I  have  referred  to; 
and,  in  deference  to  justice,  I  believe  all  fair-minded  people  will 
agree  that  the  one  hundred  thousand  or  more  officers  of  the  twenty- 
five  thousand  banks  of  the  country  should  not  be  held  to  an  account- 
ability for  the  actions  of  some  individual,  whether  or  not  such  an 
individual  is  or  claims  to  be  a  member  of  their  class. 

Again,  I  say,  provide  for  a  banking  and  currency  system  in  the 
United  States  which  will  create  a  broad  market  for  commercial  paper 
and  bills  of  exchange  and  which  will  attract  the  excess  money  of  the 
banks  of  the  country  through  providing  liquid  investments  which  are 
quickly  convertible  into  cash,  and  you  will  soon  correct  most  of  the 
alleged  abuses  of  the  use  of  money  and  credit  in  the  centers. 

Now,  gentlemen,  as  I  stated  in  the  beginning,  I  am  not  making 
these  criticisms  of  and  comments  on  the  bill  for  the  mere  sake  of 
being  contentious,  but  rather  I  do  so  in  the  hope  that  open-minded 
consideration  of  the  bill  by  those  who  are  sincerely  interested  in 
the  public  welfare  may  result  in  causing  some  changes  and  modifica- 
tions to  be  made  which  will  make  the  plan  more  workable  in  the  event 
the  bill  should  be  enacted  into  a  law. 

20 


This  bill,  as  it  stands,  is  a  compromise  between  the  conservative 
and  radical  members  of  the  Democratic  party,  and  since  it  has  many 
good  qualities  it  would  require  the  application  of  only  a  little  more 
of  the  spirit  of  compromise  and  co-operation  between  the  legislators 
and  the  bankers  of  the  country  to  make  it  fairly  acceptable  to  all. 

I  do  not  desire  to  see  legislation  defeated,  for  I  regard  the  neces- 
sities for  an  improved  system  of  banking  and  currency  as  already 
too  urgent. 

In  view  of  the  answers  received  by  the  New  York  Times  to 
questions  on  this  subject  sent  to  banks,  I  am  confident  quite  a  per- 
centage of  the  National  banks  will  not  become  subscribers;  espe- 
cially do  I  feel  the  small  banks  throughout  the  country  will  decline 
to  do  so,  and  I  cannot  conceive  how  any  system  of  banking  can  be 
entirely  successful  if  there  cannot  be  harmony  of  purpose  and  action 
between  the  twenty-five  thousand  banks  and  those  controlling  the 
system  into  which  they  must  enter. 

Summarizing,  I  would  recommend  the  following  changes  as  a 
means  of  bringing  the  plan  to  a  much  more  workable,  as  well  as  a 
more  equitable,  basis. 

Provide  for  representation  of  banks  on  the  Federal  Reserve 
Board  or  for  the  organization  of  an  Advisory  Board  composed  of 
one  selected  by  each  Federal  Reserve  Bank,  thus  bringing  into  daily 
contact  with  the  members  of  the  Federal  Reserve  Board  men  who 
would  be  familiar  with  the  banking  business  and  agricultural  con- 
ditions in  each  section  of  the  country,  thereby  insuring  a  more  intel- 
ligent discharge  of  their  duties  so  far  as  their  actions  would  affect 
business  in  the  various  sections. 

Modify  the  section  relating  to  reserves,  by  providing  that  until 
the  plan  has  been  fully  tried  out,  one-third  of  the  reserves  that 
banks  in  Country  towns  and  in  Reserve  cities  are  required  to  carry 
may  be  carried  with  Reserve  correspondents  as  is  now  done  under 
the  National  Banking  Law,  leaving  the  requirement  that  banks  in 
Central  Reserve  cities  must  carry  20  per  cent  reserves,  one-half  of 
which  must  be  in  their  vaults  and  one-half  to  their  credit  in  the 
Federal  Reserve  Bank. 

This  would,  as  I  have  already  stated,  decentralize  reserves  in 
the  centers  over  one-half  and  would  be  much  less  liable  to  disturb 
general  business  than  the  drastic  and  revolutionary  shifting  of 
reserves  now  provided  for  in  the  bill. 

Later  on,  say  five  years  after  the  plan  has  been  in  operation, 
any  further  shifting  of  reserves  of  the  banks  found  to  be  necessary 
or  desirable  could  be  effected  without  taking  the  risk  of  disturbing 
business  that  might  follow  if  the  plan  proposed  is  now  enforced. 

I  would  also  recommend  a  change  in  the  plan  for  the  issuing 
of  notes.  While  I  think  it  much  preferable  that  the  Federal  Re- 
serve Bank  should  issue  the  notes,  yet,  knowing  as  I  do,  how  deter- 
mined in  their  opinion  are  many  who  are  powerful  in  the  Demo- 
cratic party,  that  the  Government  should  issue  the  notes,  I  am  will- 
ing, in  view  of  the  fact  the  notes  are  abundantly  secured,  to  yield 

21 


that  point,  but  even  then,  the  limit  of  the  amount  that  can  be  issued 
should  be  removed  and  the  tax,  instead  of  being  on  the  notes  when 
issued,  should  be  levied  only  when  the  Federal  Reserve  Bank  issu- 
ing them  should  fail  to  maintain  a  proper  reserve  of  gold  against 
its  liabilities. 

I  cannot  feel  that  the  Administration  has  a  full  conception  of 
the  ramifications  of  the  power  the  bill  vests  in  the  Federal  Reserve 
Board,  and  I  hope  that  in  their  desire  to  enact  the  best  possible  leg- 
islation they  will  clearly  see  the  necessity  for  modifying  the  bill  in 
two  or  three  sections  with  a  view  of  so  harmonizing  the  situation 
that  the  banks  not  only  will  be  willing  to  enter  the  system,  but 
that  they  will  do  so  enthusiastically,  and  on  that  co-operatiye  basis 
so  necessary  for  the  success  of  the  plan  and  the  future  welfare  of 
our  country. 


22 


UNIVERSITY   OF    CALIFORNIA 
LIBRARY 


Due  two  weeks  after  date. 

MiW  0'5 1989 

I/lAY 


30wi-7,'12 


<  'aylord  Bros. 

Makers 

!^yracuse,N.  V, 

PAT.  M.  2],  1908 


yc  23968 


/  \  / 


HNIVBRSITY  OF  CAI.IFORNIA  LIBRARY 


U.C.  BERKELEY  LIBRARIE 


COObOIIOMO 


